indifference

curve
 Origin
The technique of indifference curves was
originated by Francis Y. Edgeworth, in
England in 1881. It was then refined by
Vilfredo Pareto, an Italian economist in
1906. This technique attained perfection
and systematic application in demand
analysis at the hands of Prof. John Richard
Hicks and R.G.D. Allen in 1934.
 Meaning:
 An indifference curve is the locus of points representing
all the different combinations of two goods which yield
equal level of utility to the consumer.

Indifference Schedule :

 Indifference schedule is a list of various combinations of

commodities which are equally satisfactory to the
consumer concerned.
Indifference Curve - Indifference curve
is a locus of points, each representing a
different combination of two substitute
goods, which yield the same level of utility
or satisfaction to the consumer.
 Assumptions Indifference Curve Analysis

1. Consumer is rational or Rationality (Maximum Satisfaction)

2. Utility is ordinal
3. Consistence in choice
If A > B, then never become B > A
4. Consumer’s Preference is Transitive:
If A > B and B > C, then A > C
1. Diminishing Marginal Substitution of goods:
2. Dependent Utility
3. A Large bundle of goods preferred to small bundle
 Indifference Schedule:

Combinations Apples Mangoes

A 15 1

B 11 2

C 8 3

D 6 4

E 5 5
Indifference Curve (IC) shows all possible
combinations of apples and mangoes between
which a person is indifferent.
Point A shows consumption bundle consisting
of 15 apples and one mango. Moving from point A
to Point B, we are willing to give up 4 apples to get
a second mango (total utility is the same at points
A and B).
 16
A
14

12
B
10
Apples

C
8
D
6 E
IC
4
2

0
0 1 2 3 4 5 6
Mangoes
Properties of indifference curves :

Indifference curves are negatively sloped

 Given a combination of commodity X and commodity Y, with every
increase in X, the amount in Y should fall in order that the level of
satisfaction from every combination should remain the same.

 It can never be a positive slope curve

 It can never be Vertical

 It can never be Horizontal

Indifference curves are convex to
the origin

 Convexity illustrates the law of

diminishing marginal rate of substitution.
 Y
PRODUCT Y

IC

O X
PRODUCT X
• Indifference curves can never
intersect each other
Indifference curves can never intersect each
other because each indifference curve
represents a specific level of satisfaction. If two
indifference curves intersect each other, then at
the point of intersection, the consumer is
experiencing two different levels of utility.
 Y
PRODUCT Y

A B

E
IC
D
C
IC

O X
PRODUCT X
 Higher Indifference Curve represents
higher satisfaction
Consumer Equilibrium
A consumer seeks a market basket that
generates the maximum level of happiness.
However, one’s money income and prices of
goods imposes a limit on the level of
satisfaction that one may attain. Thus, the
income at the disposal of the consumer in
conjunction with prices of the commodities
will determine the budgetary constraint or the
price line.
Assumptions to equilibrium of the consumer

1. The consumer has Indifference Map of good X and Good Y

2. The consumer have a fixed money income which are
spend on X and Y
3. The Prices of good X –Px and good Y – Py are given
4. Good are homogenous
 Consumer equilibrium is attained when, given his budget constraint,
the consumer reaches the highest possible point on the indifference
curve. The maximum satisfaction is yielded when the consumer
reaches equilibrium at the point of tangency between an
indifference curve and the price line. At point E, the price line is
tangent to the indifference curve.

 At the equilibrium point, slope of indifference curve = slope of price

line

 slope of indifference curve = MRS

 slope of price line = PX / PY

 Thus, at point E, MRS = PX / PY

 Thus, satisfaction is maximized when the marginal rate of

substitution of X for Y is just equal to the price of X to the price of
Y.
Indifference Map and Budget Line of consumer

A graph showing a whole set of indifference curves is called an

indifference map. An indifference map, in other words, is comprised of
a set of indifference curves. Each successive curve further from the
original curve indicates a higher level of total satisfaction.
 Budgetary constraint & The
Budget Line
The limitedness of the income acts as a
constraint on how high a consumer can
ride on his/her indifference map.
Indifference Map and Budget Line of consumer
A budget line or price line represents the various combinations of two
goods which can be purchased with a given money income and
assumed prices of goods".

Income (Y)= 60
Price of Biscuit (Px) = 6
Price of Coffee(Py) = 12
Combination Biscuit Coffee

A 10 0

B 8 1

C 6 2

D 4 3

E 2 4

F 0 5
Consumer’s Equilibrium or Maximization of Satisfaction

"The term consumer’s equilibrium refers to the amount of goods and

services which the consumer may buy in the market given his income and
given prices of goods in the market".
The aim of the consumer is to get maximum satisfaction from his money
income.

"A consumer is said to be in equilibrium at a point where the price line

is touching the highest attainable indifference curve from below"
First order and Second order condition for consumer Equilibrium

Thus the consumer’s equilibrium under the indifference curve theory must meet
the following two conditions:

First order condition : A given price line should be tangent to an

indifference curve or marginal rate of satisfaction of good X for good Y
(MRSxy) must be equal to the price ratio of the two goods. i.e.
MRSxy = Px / Py
Slop of IC = Slop of Budget Line

Second order condition : The second order condition is that

indifference curve must be convex to the origin at the point of tangency.